There is growing consensus among policymakers and stakeholders that an effective federal program to reduce greenhouse gas (GHG) emissions should include polices that hasten the development and commercialization of low- and no-carbon energy technologies, as well as technologies that increase end-use energy efficiency. Alongside policies such as a GHG cap-and-trade system that would directly mandate emissions reductions, policies that would instead target innovation and investment in GHG-reducing technologies have been much discussed. While both types of policies may be motivated by concerns about climate change, technology policies are generally framed in terms of technology-development activities or technology-specific mandates and incentives rather than primarily in terms of emissions.

A wide range of options for promoting climate-friendly technologies is currently being employed or proposed at the federal and state levels. It is useful to roughly categorize these options according to which stage of the technology-innovation process they target: research, development, and demonstration (RD&D) or commercial deployment. After exploring various rationales for technology policy, this issue brief examines the funding sources, institutions, and policy instruments that have a potential role to play in enhancing RD&D efforts to advance climate change mitigation and adaptation technologies. A companion issue brief addresses options for promoting technology deployment, including mandates, financial incentives, and enabling regulations. A number of important messages emerge:

An emissions price established through a GHG cap-and-trade or tax system would induce firms to invest and innovate in developing technologies that reduce emissions more effectively and at lower cost.

Nonetheless, several motivations exist for including additional RD&D policies as complements to a pricing policy in a comprehensive strategy to address climate change. R&D tends to be underprovided in a competitive market because its benefits are often widely distributed and difficult to capture by individual firms. Given the likelihood that the magnitude of GHG reductions needed to address climate concerns will increase significantly over time, private-sector investment in technology innovation is likely to fall short of what may be desirable over the long term, particularly given the fragility of expectations concerning future GHG prices and the uncertain credibility of near-term policy commitments. Ensuring that capable, university-trained researchers will be available to the public and private sectors in the future provides another compelling motivation for public spending on technology R&D, especially given the importance of investing in human capital to maintain long-term economic competitiveness.

While public funding for research tends to be widely supported, there is less agreement about the justification for public-policy intervention (beyond the emissions price) as one moves from basic R&D to the demonstration and deployment phases of technological innovation.

Although particular energy RD&D programs have produced some notable failures and although their performance has varied widely, studies have found that federal energy R&D investments have on the whole yielded substantial direct economic benefits as well as external benefits such as pollution mitigation and knowledge creation. Government-sponsored energy R&D programs are also commonly thought to have improved substantially since the 1970s and early 1980s - both in terms of the way they are managed and in terms of the objectives they target - as their emphasis shifted from energy independence and large-scale demonstration projects to environmental improvement, precommercial research, public-private partnerships, and cost-sharing. Private industry involvement is almost always mentioned as being very important, particularly as new technologies approach the commercialization stage.

Substantially boosting efforts to develop and deploy low-GHG energy alternatives would require a sustained increase in RD&D funding and increased market demand for associated technologies (where increased demand would likely be due, at least in part, to the concurrent implementation of policies that provide an economic incentive for reducing GHG emissions). Increased funding could come from general revenues through the standard appropriations process, from revenues generated by emission taxes or the sale of emission allowances, or from wires and pipes charges on electricity and other fuels. Alternatively or in addition, increased investment could be induced through more generous R&D tax credits. Because associated revenues may be less likely to be diverted for other budget purposes, allowance sales or wires and pipes charges, or both, are likely to provide the largest and most stable dedicated funding stream.

Numerous existing institutions are engaged in energy RD&D, including the U.S. Department of Energy (DOE), DOE's national laboratories, the National Science Foundation (NSF), universities, individual firms, private research consortia, and non-profit research institutions. These institutions vary both in terms of their roles in funding versus performing research and in terms of which stage(s) of the innovation process they primarily engage (i.e., basic research, applied research, development, and demonstration). The existing system of institutions involved in energy innovation is best characterized as an interconnected network of entities with different and somewhat overlapping roles - it does not have a highly unified or linear structure.

A number of objectives are frequently noted in relation to public investments in RD&D. These include effective and efficient management and performance, stable funding, insulation from politics, and public accountability. Some of these aspirations are mutually reinforcing, while others may conflict.

Regarding the administration and coordination of federal energy RD&D, greater concern is typically expressed about existing institutional capacity to manage an expanded funding base for applied RD&D than about the ability of existing government institutions (such as the DOE Office of Science, the NSF, and the National Institute of Standards and Technology) to effectively administer increased funds for basic research. The existing suite of institutions that actually perform RD&D - including universities and other non-profit institutions, the national laboratories, and private firms - seems sufficiently broad to handle an increase in funding, although capacity would need to deepen if considerable expansion of current research efforts was desired.

The main institutional options for administering an expanded public investment in applied energy RD&D are the existing DOE program offices (i.e., Energy Efficiency and Renewable Energy, Fossil, and Nuclear), a new government agency or agencies (for example, recent proposals have called for an energy version of the Defense Advanced Research Projects Agency or "ARPA-E" and a Climate Technology Financing Board), a new quasi-public corporation (recent proposals refer to a new Energy Technology Corporation or Climate Change Credit Corporation), and/or private research consortia. These options differ in terms of how likely they are to meet the range of policy objectives mentioned above (e.g., efficiency and accountability) - in perception and in practice.

The primary mechanisms that have historically been used to deliver public support for RD&D - including contracts, grants, and tax credits - will continue to play a central role, perhaps with some incremental modifications. Technology innovation prizes represent a new opportunity for expanding the range of instruments used to provide RD&D incentives; both the private and public sectors are currently experimenting with this approach.